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Michie, J. & Oughton, C. (2003). HRM, Employee Share Ownership and Corporate Performance, Research and Practice in Human Resource Management, 11(1), 15-36.

HRM, Employee Share Ownership and Corporate Performance

Jonathan Michie & Christine Oughton


A great deal of interest has been generated on understanding linkages between work commitment, job motivation and productivity. The purpose of this paper is to consider the link between employee commitment and motivation, on the one hand, and productivity on the other, and in particular whether employee share ownership can play a positive role in this regard. The focus is, therefore, on the effects of employee share ownership and employee participation on corporate performance. A departure point is the UK government’s policies to promote employee share ownership, which has been presented explicitly as a means to boost productivity via enhanced employee commitment and motivation. How employee share ownership may enhance corporate performance in terms of impacting on corporate governance is also discussed.


Raising productivity in UK firms to match levels in other European countries and the US is a key objective of the UK Government’s economic policy agenda. This is a major and long standing issue. There is a range of factors involved and research suggests that closing the productivity gap will require increased investment in research and development (R&D), capital and people, improved education and training, and a modernised productive infrastructure including transport. The long standing problem of short-termism in British industry needs to be resolved; and within companies, continuous improvements are needed in management practice, corporate governance and organisational design. But productivity is fundamentally about how productive people are at work. Clearly their skills, motivation and commitment are key (Philpott 2002):

...on the most recent comparative measure of output per person employed, UK productivity was found to be around 39 per cent below that of the USA, 15 per cent below France and 7 per cent below Germany. There is a whole host of reasons for the productivity gap, but with specific regard to the workplace the problem seems to be one of uneven application of effective management techniques and training and development opportunities. (p.15)

It is in this context that the UK Government introduced a number of new arrangements, including tax incentives in the 2000 and 2001 budgets, to encourage employee commitment and motivation through the use of employee shareholding, with the aim of improving Britain’s productivity performance.

Will this work? What is the theory behind it, and is there any supporting evidence? These are the questions addressed in this paper. The discussion suggests in economic terms there is certainly a rich seam to be tapped here, and indeed by further developing government policy in this area, still more could be achieved.

There are two further developments in UK Government policy, via the European Union, relevant to the idea that enhanced employee participation may lead to improved corporate performance. First, the European Works Council Directive was introduced in 14 of the 15 European Union member states in September 1996. The UK initially obtained exemption from this Directive but has since agreed to comply. Second, the European Information and Consultation Directive designed to encourage information disclosure and consultation with employees has now been approved. In addition to these developments, the rapid pace of change in corporate governance structures and the ongoing review of and possible changes to the legislative framework in the UK and Europe suggest a need to re-examine the impact of corporate governance on economic performance, including as regards its impact on employee involvement and hence commitment, motivation and productivity. In particular, it is evident that both government and business leaders are taking an increasingly broad-based view of corporate governance and the various channels via which governance structures affect competitive advantage. Although there are exceptions (Aoki 1984), much of the recent academic literature has taken a fairly narrow view of corporate governance, focusing on the role of Executive/Manager Shareholders, CEO compensation, Board Composition and the degree of participation of institutional investors in voting and decision-making.

In a series of authored and edited books, Blair and her colleagues, have argued that such analysis needs to be extended to take account of other stakeholders, including employees. Blair (1995) argued that corporations should be regarded not just as bundles of physical assets that belong to shareholders, but rather as institutional arrangements for governing the relationships among all the parties that contribute firm-specific assets, including long-term employees who develop specialised skills of value to the corporation. Blair and Kochan (1999) argue that human capital and organisational capital are increasingly important as a source of value in many firms, yet at the same time employment practices appear to be changing in ways that reduce loyalty and commitment and encourage mobility on the part of employees. And Blair and Roe (1999) analyse the many ways - formal and informal - that employees are actually involved in the governance of corporations in America, Germany and Japan.

Employee participation offers an antidote to corporate power that ensures the interests of employees, as well as shareholders, are taken into account in company decision-making. There are a variety of mechanisms that companies may use to enable employee participation, from direct participation in day-to-day decision making to Board level participation. Employee share ownership offers a second route to increasing employee influence, provided that employees own a significant stake and their voting rights are pooled. The effects of participation in decision making and financial participation may be more than the sum of their parts when they coexist in organisational structures that combine participation in decision making with financial participation whereby employees hold a significant portion of equity with pooled voting rights.

This is the approach and logic pursued in the current paper. The rationale for incorporating the effects of employee participation and shareholding into the broader analysis of corporate governance is threefold. First, one of the theoretical foundations of studies of corporate governance is the principal-agent problem and agency theory. Principal-agent models have been developed to analyse explicit contractual relationships when contracting partners have divergent interests and there is imperfect information. Most of these studies focus on the effects of the separation of ownership from control associated with public share offerings. However, it is evident that within the firm the agency problem is not confined to the relationship between owners and managers. There are embedded agency problems that include relationships between owners and managers; managers and non-managerial employees; and owners and non-managerial employees. These relationships reflect embedded imperfect information problems and misaligned incentives that run throughout the firm. Employee share ownership provides one mechanism for aligning the interests of employees and owners and the interests of managers and non-managerial employees.

Second, corporate governance is about who takes decisions within companies and this must necessarily include the extent to which employees participate in strategic and operational decision-making. There is an extensive human resource management (HRM) literature on employee participation/involvement and the effect of different HRM practices on corporate performance outcomes. In addition, there is a related literature that focuses on organisational behaviour/psychology and cultural and institutional theories (see, for example, Aoki 1984), which show how different organisational structures and different cultural environments within the firm affect corporate governance and performance. Both the HRM literature and organisational theory literature use models of human behaviour which break with the principal agent theory’s assumption of individual utility maximising behaviour. In particular, they examine the effects of cooperative behaviour and collective action on employee motivation, productivity and firm performance.

Finally, there is the question of what motivates different types of shareholders. Standard principal agent models assume that all shareholders are motivated by wealth and profit maximisation and that investors make the best use of available information. This approach, therefore, glosses over the possibility that different types of shareholders may have different objectives (and time horizons over which those objectives are measured), and ignores information asymmetries across shareholders/investors. A particular issue concerns the investment decisions of large institutional shareholders, such as occupational pension funds. In the UK, during 2000, a review was undertaken to examine whether the investment decisions of institutional investors were rational and well informed. This review also explored how investment decisions were made, the expertise of trustees, and the extent of shareholder activism. Contrary to the theoretical assumption of agency theory - that shareholders aim to maximise wealth/profits - the review found that institutional investors lost considerable value by failing to actively engage with companies in which they have holdings, even where they have strong reservations about strategy, personnel or other potential causes of corporate underperformance. One of the key recommendations of the review was that the law be changed to make ‘activism’ - including the voting of proxies - a fiduciary duty of fund managers.

Together, these three sets of reasons imply that employee ownership and participation have important effects on corporate governance. It is also evident that these three mechanisms - employee ownership, employee participation, involvement and cooperation, and shareholder activism - are not mutually exclusive but have joint and interactive effects on motivation, productivity and corporate performance.

The theory is that owning shares will provide employees with financial incentives that will make them more committed to the organisation and more motivated at work. If the company is more profitable, they will gain financially through dividend payments and an increased share price. Greater motivation at work will have a direct effect in improving productivity through greater effort and possibly innovation. There may be a further benefit, alluded to in the Chancellor’s comments, if greater commitment to the firm results in reduced labour turnover. This will make it more worthwhile for firms to invest in training for their workforce. Less commented on - in either the academic literature or public policy discussions - is the fact that the payback from investment in product and process innovation depends crucially on the tacit knowledge accumulated by the workforce, so reduced labour turnover can increase the long term payback from such investments. This effect may not only increase productivity and profitability - it may thereby make the difference between the firm deciding to proceed with the proposed investment, or not.

This paper, therefore, considers models of corporate governance and legal structures that facilitate the combination of employee ownership, participation and shareholder activism, and discusses the routes by which such participation might be expected to impact on organisational outcomes and corporate performance. In the following section, the theoretical and empirical evidence on the relationships between employee participation, employee share ownership, corporate governance and performance is reviewed. In the next section, how employee share ownership and participation can be combined through new governance structures via the formation of active and democratic employee shareholding trusts is discussed. The final section then draws some conclusions and identifies areas for future research.

Employee Share Ownership and Participation

Research on the ownership structure of firms suggests that ownership matters for at least two reasons. First, because ownership is associated with certain rights, most notably the right to residual income or profits and the right of (potential) control or voting rights, including the right to hire and fire employees (Coase 1937). Second, because different ownership structures produce different incentive mechanisms. The fact that the owners of firms receive residual income, or profit only after all other incomes have been paid is said to act as a powerful mechanism for the shareholders to hold their agents (managers) to account. Private ownership is thus held by the economic orthodoxy as bringing with it certain efficiency outcomes. The board or the manager will need to be efficient, otherwise profits will fall, the share price will suffer, and this will allow an outsider to buy up the company and replace the management to run the company more efficiently. This will result in a rise in the share price. The outsider can then sell the company and enjoy a windfall gain.

With the separation of ownership from control, the objectives of owners and those taking decisions within the firm diverge: managers and other employees are interested in maximising their incomes, not corporate profit. They may also have very different time horizons to those of financial shareholders. In the absence of perfect information and perfect monitoring, decisions may be taken that are not in the interests of owners. However, information asymmetries may make it impossible for shareholders to know what is going on, or to form accurate judgement as to whether the business is being run with maximum efficiency. The opportunities to exercise ownership rights via voting occur only at discrete moments in time, such as at the company AGM, and the public nature of such meetings may make it difficult for owners to express their concerns without damaging the share price and their own wealth.

Within the literature on corporate governance there has been extensive analysis of the agency problems that arise between shareholders and managers. The stock market could in principle act as a disciplinary mechanism to the extent that firms that were performing badly would be taken over. However, the supposed discipline of the takeover threat may not operate as keenly as the stock market theory (which assumes perfect information) implies. The companies targeted for takeover are generally not inefficiently run. On the contrary, they are often the young and expanding companies that have spent on research and development or made other investments in innovation. Indeed, the stock market may operate as a disincentive to such productive activities, as they may attract predators, even more so since investing in such long-term activities as research and development will depress short-term profits and hence possibly the share price, making a takeover all the cheaper. And the evidence suggests that in general, firms are no more efficient after a take-over than they were before.

Financial share ownership by institutions outside the company also raises another problem, namely the divergence between short-term financial gains and the long-term performance of the company. In essence, the time horizon of financial investors may be shorter than the time horizon of managers and employees, which is driven by the need to manage and operate long-term tasks such as innovation and change in order to maintain the long-term viability of the company. With private ownership, shareholder interests come first. These are defined and generally understood as financial interests. And in the context of the UK stock market, as short-term financial interests. The interests of those with a long-term stake in the performance of the company are thereby downgraded as are the long-term interests of the enterprise itself. If it is in the short-term financial interests of shareholders to sell up the business to make way for a parking lot, then that is what must happen.

Imperfect information, the multi-layered nature of the principal-agent problem, the ability of owners to engage in voting only at discrete intervals and the existence of different timehorizons between institutional investors and managers and employees imply that issues of corporate governance extend beyond the potential conflict of interest that exists between shareholders and managers to include further questions regarding the potential divergence of interests between owners and non-managerial employees, and managers and other employees. The conflict between short-term and long-term profits/returns makes it questionable as to whether enterprises should operate solely in the interests of outside shareholders – which in the UK means overwhelmingly the financial institutions. In a legal system that prioritises the rights of shareholders over other stakeholders, resolving short-termism requires either: (i) increased activism from shareholders with medium to long-term time horizons; (ii) a change in the law (which in the UK is the focus of the ongoing reports on corporate governance and company law); or (iii) a change in ownership structures. As we argue below, these three options are not mutually exclusive. Empirical research in the corporate governance and HRM literature has shown that all three factors can positively enhance the long-term competitive position of the firm. We briefly review these separate literatures below and argue for an integrated approach towards improving corporate governance. First, though, we report and discuss the most relevant recent work within the HRM literature.

Financial Participation and Performance

Capital Strategies produces an Employee Ownership Index (EOI) of the share prices of firms listed on the London Stock Exchange that have a ‘significant degree’ of employee share ownership; over the period 1992-2000 this index outperformed the FTSE All-Share Index by 173 per cent. What, though, are the causal mechanisms at work? McNabb and Whitfield (1998), using the UK’s 1990 Workplace Industrial Relations Survey (WIRS) data, found financial participation positively related to financial performance. But they also show that strong interaction effects mean that the influence of financial participation schemes cannot be analysed independently of other types of employee participation schemes, and that the effects of problem-solving schemes, for example, are dependent on the linkage with a financial participation scheme, while downward communication, on the other hand, tends to have a positive effect regardless. However, using the 1998 Workplace Employee Relations Survey (WERS) data, Addison and Belfield (2000) find different results, for example discerning no significant association between downward communication and firm performance. McNabb and Whitfield (2000) confirm that the two data sets generate different results, concluding that while there are enduring links between employee participation and financial performance, the precise nature of these requires more careful investigation than has thus far been possible.

Also using the 1998 WERS data, Conyon and Freeman (2001) found that firms and establishments with shared compensation arrangements perform better than other firms in productivity and financial performance. The stock price of firms with shared compensation practices also outperformed those of other firms. Conyon and Freeman (2001) then surveyed 1518 UK listed companies and found that of their 299 returns, those with approved profit sharing or all employee share schemes outperformed the FTSE All Share index by 40 per cent. They also found that firms and establishments with some form of shared compensation, particularly those with deferred profit sharing and employee share ownership are more likely to establish a formal communication and consultation channels with workers than are other establishments. This raises the question of what is actually causing the improved performance. It may be through increased commitment and motivation, but what is causing this? Is it just the financial incentive, or is it the improved communication and consultation that appears to follow - or at least be associated with - employee share ownership?

Certainly there is a large literature suggesting that employee commitment and motivation can be enhanced through a range of progressive human resource management practices, including but not restricted to employee share ownership. It may be that the key effect of employee share ownership on performance is through making it more likely that firms introduce these other HRM practices, of communication, involvement and participation. In addition, where such practices are pursued, the existence of employee share ownership may underpin and enhance the positive effect that these have on commitment and motivation, by increasing the faith that employees have that such involvement and participation is genuine and long term.

Surveying employee share ownership across the EU, Pendleton (2001) concluded that:

There is a relationship between financial participation arrangements and other forms of employee participation (direct and/or representative) - enterprises that have financial participation are more likely to also have other participation and communications arrangements in place. This supports research findings that financial participation works best when it is integrated with other participative, information and consultation arrangements, for example, in supporting ‘high performance’ work organisations. (p.5, emphasis in the original)

The ‘collective voice’ aspect of participation and involvement at work has been found to have a significantly positive effect on motivation and commitment, and where this collective voice takes the form of an employee shareholding trust, this may again make the introduction of progressive HRM policies both more likely and more effective.

The causal links from employee share ownership through to productivity enhancement can thus be grouped within three categories, the first two of which are being assumed by the UK’s Chancellor of the Exchequer, and upon which his policy in support of employee shareownership depends for its efficacy, while the third category is the additional effects just described, which if found to have substance would suggest that the Chancellor’s policy agenda in this area may actually have the potential for delivering more than he had hoped, although to benefit from these additional effects the policies themselves may need to be further developed.

First, the Chancellor is assuming that employee share ownership will be seen by employees as representing a positive financial incentive, and that this will lead them to be more committed and motivated. The existing academic literature provides supporting evidence for both assumptions, with one caveat, namely that employees are aware that an increase in their own individual effort at work will not have a significant enough impact on productivity and profitability to alter the dividend they receive on their shares, nor on the share price. Any such effect requires increased commitment and effort from the work force collectively - the sort of teamwork that the Chancellor did refer to in his 2000 budget speech, quoted previously.

Second, the Chancellor is assuming that increased commitment and motivation will lead to increased productivity and profitability, directly through increased ‘effort’ and indirectly through reducing labour turnover, hence increasing the pay-back that firms enjoy from investment, both in training and in new products and processes, with a concomitant tendency for firms to increase such investments accordingly. This recognition that reduced labour turnover may actually bring benefits is to be welcomed, given the assumption by some that increased turnover indicates flexibility and is, therefore, an economic benefit. This idea that the future of work would inevitably mean ‘flexibility’ in the form of reduced tenure, increased turnover, ‘portfolio’ working and the rest has, though, increasingly been seen to be superficial, not grounded in any serious analysis or research, and misleading as a guide to policy (see Michie & Sheehan 2003a).

These links have been tested in what might be termed the ‘High Commitment Work Systems’ literature (for a survey, see Michie 2001). As with any such statistical work on large data sets, measuring what are inevitably very different firms in changing circumstances, with managements and work forces that are not homogenous either within or between firms, the results from the studies differ, but most do find such a causal link, from motivation to outcomes. That literature also tends to find a positive link from progressive HRM practices that encourage involvement and participation, through to increased motivation and commitment. Thus, there is a large body of literature already providing support for these links.

The third category of causal processes is additional to those assumed by the UK Chancellor, as follows:

Grouping the various effects into the three categories, there is evidence to support the view that financial participation is positively related to financial performance (McNabb & Whitfield 1998). It is suggested these factors are inextricably linked to other types of employee participation schemes, supporting the broader view we have sketched above, whereby different progressive HRM policies - such as employee share schemes on the one hand, and involvement and participation on the other - may reinforce each other and indeed may be linked causally in a variety of ways. This is related to another finding from what we are describing as the ‘High Commitment Work Systems’ literature, that the effect of introducing progressive HRM policies may depend on how these are combined (or ‘bundled’). There are theoretical reasons and empirical evidence for believing that such practices may be more than the sum of their parts if implemented appropriately. Or conversely, pursuing one or more policies may be a waste of time and effort if other symbiotic policies are not also being implemented. It may be a waste of resources to train employees if they have not been motivated to contribute, or if there is not the appropriate work organisation to allow them to make a greater contribution. Likewise, motivation itself may be insufficient if other factors are not in place (evidence for this is reported in Michie & Sheehan, 2003b).

As regards the second grouping of effects, of participation and involvement on motivation and commitment, and from there to increased productivity and profitability, the bulk of the research to date has been in the US, and on manufacturing. That work generally finds significantly positive linkages; see for example Appelbaum et al. (2000) which also refers to much of the previous literature (as do most of the other papers cited below). The work in the UK, using the 1990 WIRS and 1998 WERS datasets has found similarly positive linkages to outcomes in terms of productivity and profitability (on the 1990 WIRS, see Michie and Sheehan 1999a and on the 1998 WERS, see Guest et al. 2000). These positive linkages have also been found to include increased innovation; on the link from participation and involvement to increased product and process innovation (see Michie & Sheehan 1999b).

However, there are limits to how much those datasets can reveal. Drawing upon data from a ten-year study of over a hundred small and medium-sized manufacturing enterprises in the UK, Patterson et al. (1997) found that HRM practices were the most powerful predictors of company performance. Conducting our own surveys of companies, we also found significantly positive linkages, particularly with innovation as an outcome, and with the causal links sketched above seeming to correctly describe the underlying processes at work. On the link from participation and involvement to innovation, see Michie and Sheehan (2003b) and on the link to good corporate performance more generally, see Michie and Sheehan-Quinn (2001). However, our latest survey found rather mixed results when looking at productivity and profitability, with the regression coefficients on many of the links not being statistically significant (see Guest, Michie, Conway & Sheehan, in press).

The ‘third group’ of effects might lead to a greater boost to productivity as a result of Government policy than would be forthcoming from the simple ‘financial incentive’ mechanism alone, at least if those policies were developed so as to capture these additional benefits. Here the existing literature is weakest. Whether the existence of employee share ownership will lead to employees feeling that they have a collective voice will depend on whether the shares are held collectively in a trust or some other arrangement. The literature suggests that a collective holding may encourage a culture of team work and a co-operative company spirit that would deliver productivity benefits which would not follow from individual employee share holding because of the ‘free rider’ problem, where individual effort and reward cannot be clearly identified and where to improve productivity, and hence financial return, requires a collective rather than an individual effort (Conyon & Freeman 2001; see also, Kandel & Lazear 1992, Kruse & Blasi 1995, Lazear 1995, Blasi, Conte & Kruse 1996).

In 1987, the US General Accounting Office study found that Employee Stock Ownership Plans (ESOPs) had an inconclusive impact on outcomes, except when employee ownership was coupled with employee participation in management decision making (GAO 1987). Since then research findings have suggested a more positive link. For instance, Kruse and Blasi (1995) reviewed the accumulated evidence concerning the prevalence, causes, and effects of employee ownership, covering 25 studies of employee attitudes and behaviours, and 27 studies of productivity and profitability (with both cross-sectional and pre/post comparisons). They found that perceived participation in decisions is not in itself automatically increased through employee ownership, but may interact positively with employee ownership in affecting attitudes. The dispersed results among attitudinal and performance studies indicate the importance of firm-level employee relations, human resource policies, and other circumstances. Kruse and Blasi (1995) reported that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance. Consequently, they have called for further research on complementary HRM policies and practices and ESOPs which might jointly produce positive effects on corporate performance.

Logue and Yates (2001) discuss much of the existing (US) literature, and also analyse survey data. They argue that there are, potentially, strong positive links from collective employee shareholding to corporate outcomes, but only where these are combined with policies of participation and involvement. For the UK, Conyon and Freeman (2001) analysed the 1998 WERS data, linking the financial performance and labour productivity of each establishment to the percentage of non-managerial workers covered by the IR approved employee ownership schemes. Their analysis took account of differences in number of employees, age of establishment, the industry, the distribution of the workforce by skill and gender, and the degree of competition in the sector. The relationship between employee share ownership and economic performance (financial performance and labour productivity) was found to be positive.

Owners, Managers and Employees

A number of studies have, then, explored the impact of employee representation and participation on productivity, profitability and measures of employee job satisfaction and well being; similarly, numerous studies have attempted to assess the effects of employee share ownership and profit sharing on corporate performance and employment. There are reasons to expect mutual forms of corporate governance that combine employee share ownership, representation and participation, to have different effects on corporate performance, than governance structures that merely encourage either employee share ownership, or representation, but do not combine these two facets in a participatory organisation form.

Employee participation within the workplace is generally regarded as important in generating and sustaining company loyalty and commitment to the organisation. Establishing and sharing a company ethos and culture is seen as a desirable outcome for organisational success. One reason for this is that attempting to secure effort from employees via supervision is at best costly and often simply impossible. Incentive schemes may be impracticable where results depend on team effort. To operate well, incentives in this case need to go beyond simply appealing to individual calculations of the costs and benefits to the employee of deploying greater effort - since such a calculation would often result in the employee deciding rationally to ‘free ride’ and still benefit from the collective incentive scheme. Instead such schemes need to be designed to engender collective trust and commitment.

Encouraging employee participation through the particular route of ownership stakes has taken a number of forms over the years and in different countries. From worker co-ops to management buy-outs, share ownership by employees has long been the subject of corporate and public policy. As noted, the March 2000 and 2001 budgets in Britain introduced incentives designed to encourage employee share ownership. But is participation actually enhanced by ownership? Does employee participation and employee share ownership have the same results? To be successful over the long term, companies need to innovate both in what they produce or offer and in the way in which they produce or the processes they adopt. The active participation of the work force is seen as increasingly important in these processes, particularly in high value added sectors and the ‘new economy’ more generally. On the other hand, the short-term interests of shareholders may favour dividend payments rather than R&D and other innovative investments, the payback from which may not only be uncertain but also, at best, long term.

A study by Michie and Sheehan (1999a) investigated the relationship between firms’ human resource management practices - particularly employee participation and representation - on the one hand, and firms’ levels of R&D expenditure and the probability of their introducing innovative investments on the other. Various types of participatory and representative practices and human management techniques were considered, both in isolation and as implemented in coherent ‘bundles’. The study examined not only employee participation and representation mechanisms, including contingent pay schemes, but also included an analysis of the relation between these practices on the one hand, and on the other, flexible job assignment and the relation to the firm’s innovative activity. The use of participatory practices was found to be positively correlated with the probability of the firm innovating.

While it is widely recognised that ‘flexible’ employees are important for firms’ competitiveness, the above work found that such practices needed to be complemented with adequate involvement mechanisms including reward systems and training, without which they could result simply in an increased intensification of work. While cost cutting strategies and work intensification can bolster profitability in the short term, in the longer term developing participatory and representative mechanisms will prove increasingly important to those firms that wish to compete using new products and processes (see Michie & Sheehan 2003b, which discusses this in detail and reports the results from several papers that provide empirical support for a ‘high road’ approach to labour flexibility, of investing in people, with concomitant findings that a ‘hire and fire’ approach to labour flexibility is actually associated with lower innovation and worse corporate outcomes).

Corporate Governance and Employee Participation

Corporate governance in both the US and the UK is structured around the shareholders as very much the key stakeholder. But that does not mean that employee participation and involvement are non-issues. As indicated above, employee participation and involvement are important for the long-term prosperity of the company, or success or the organisation, and this has a material bearing on shareholder returns. It is, therefore, important to develop mechanisms to encourage employee participation. One of the benefits of developing such systems is in combating short-termism which can otherwise lead to managers and Boards of Directors making decisions on the basis of short-term dividend returns or share price maximisation rather than the long term development of the concern. Such ‘short-termism’ has long been a problem for British industry. Kitson and Michie (2000) report, for example, that over all peak-to-peak economic cycles since the mid-1960s, the growth of the UK’s manufacturing gross capital stock has been inferior to that of the other major industrial nations. During the 1979-1989 cycle the growth of the manufacturing capital stock in Britain actually fell to zero.

In the UK, the problem of short-termism has actually become worse over the past 20 years, with managers having become more cautious about creating additional capacity. Analysing the level of investment in new capacity that managers of UK firms would make with any given level of demand or rate of interest, Driver and Michie (1998) found that this had fallen significantly over time. This is no doubt due in part to the experience of the recessions in the early 1980s and early 1990s. But the continual pressure to deliver ‘shareholder value’ above all else has also had a damaging effect not only on the interests of other stakeholders, but on long-term investment in the business itself. In this regard, it is notable that the dividend payout ratio in the UK is on average 40 per cent of profits, which is almost double that of the US company average (Oughton 1997).

The focus of the current paper is on establishing an integrated approach to corporate governance that includes ownership, employee participation and high performance work systems and shareholder activism (for a discussion of the literature on high performance work systems, see Michie 2001). Employee participation, high performance work systems and ownership are an important part of this. However, this needs to be seen in the context of developing appropriate governance structures that take account of other aspects of corporate governance including managerial incentives and institutional activism.

The relationship between employee participation and corporate performance was investigated in a research project funded by the Economic and Social Research Council’s (ESRC) ‘Future of Work’ Program. This ESRC project (led by Michie, Guest & Sheehan) built on previous research by exploring the processes whereby human resource practices such as employee participation schemes actually feed through to different performance outcomes. In particular, our survey and case study work explored the processes whereby such practices impact on employee attitudes and behaviour and the possible influence of such attitudes and behaviour on performance.

Combined with other human resource practices such as training, employee participation can have a positive impact on outcomes. First, ensuring and enhancing the competence of employees; second, tapping their motivation and commitment; and third, designing work to encourage the fullest contribution from employees. All three elements should be present to encourage positive employee attitudes and behaviour that should in turn impact upon establishment level outcomes such as low absence, quit rates and wastage as well as high quality and productivity. These in turn should feed through into better sales and financial performance.

These propositions have been tested through two large cross-sectional studies conducted in the UK, one at establishment level and one at the corporate level. The results are referred to elsewhere and so will not be reported at length here (see Guest, Michie, Sheehan & Conway 2000a, and Guest, Michie, Sheehan, Conway & Metochi 2000). Two important conclusions have emerged, though. The first is that employees respond positively to what might be termed ‘high commitment’ human resource practices such as promoting participation and involvement. The second is to confirm the sort of causal links suggested above, from human resource practices such as participation and involvement through to the attitudes and behaviour of employees, and from there on to performance outcomes such as productivity. This is discussed in more detail in Guest et al. (2000b), which also briefly summarises the two pieces of survey work. The final report from that project (Guest et al., in press) tests such findings, of positive links from progressive Human Resource Management practices through to corporate outcomes, when previous corporate performance is also taken into account. Perhaps not surprisingly, ‘success breeds success’, and previous good performance helps explain current good performance. Of course, the previous good performance may in turn have been caused, at least in part, by the use of progressive Human Resource Management practices. But nevertheless, this result should warn against any simplistic reading from correlation to causation. Similarly, Patterson et al. (1997) found that Human Resource Management practices explain 18 per cent of the variation in productivity and 19 per cent of the variation in profitability in companies studied. Studies in the US have also confirmed the positive effect of high involvement, total quality management systems (see, for example, Appelbaum & Berg 2000, Douglas & Judge 2001).

These results are also consistent with the ‘Productive Systems Analysis’ developed by Wilkinson (1983) and developed by a number of contributors to Burchell et al. (2003), in which the labour process is recognised to involve issues of power, authority and control over production. The role of co-operation and conflict is, thus, key to understanding how organisations, companies and economies actually operate. Providing a collective voice for employees within the workplace can hence assist the operation of the organisation. Indeed, the need for trust between employers and employees, for stronger worker participation, and proper sharing of information within the workplace is advocated by the UK’s Department of Trade and Industry (DTI, 1999).

Employee Share Ownership

The theory and practice of employee share ownership has been discussed in detail elsewhere (see for example Russell & Veljko 1991, Erdal 2000, and the journal Economic Analysis which regularly reports such studies), and is not, therefore, repeated at length here. Two points are worth mentioning, though. The first is that the diffuse ownership of shares by employees with small percentage shareholdings will not in itself improve corporate governance, since each employee’s individual holding is likely to be insignificant in the context of the total number of shares. Collectively, however, the employees may own a significant enough stake in the company to give them an effective say in how the company is run - if there was a mechanism for pooling the votes of these employee shares.

The second is that as a financial investment, it makes more sense for employees to hold shares in a company or companies other than the one in which they work. Otherwise, should that company become insolvent, the individual risks losing his or her savings as well as their job. To advocate the holding of shares in the company for which the individuals actually work, there needs to be a good reason for advocating such a decision. That is, one must be convinced that mechanisms exist to ensure that the sort of potential benefits described above that can flow from employees feeling involved in the company for which they work are actually in place. In other words, there must be some positive outcome in terms of company performance that follows from such shareholdings. Otherwise the employees would be better off holding shares in some quite different company.

The current UK Government is clearly aware of the potential benefits to companies and hence to the economy from encouraging employee involvement, and of the potential role that employee share ownership might play in creating this involvement. The 2000 and 2001 budget provisions to encourage such employee share ownership. But if this is to be translated into any sort of meaningful voice within the company, further action is needed. The importance of creating such a voice is twofold. First, for the reasons implied by tendered discussion of corporate governance, and the importance of recognising employees as important stakeholders. Second, because and unless employees are convinced that their shareholding does indeed play some such role, there may not be the necessary commitment to holding on to those shares (other than for the purely financial motive, that the tax incentives make the holding of those shares more lucrative than other methods of holding wealth). For such shareholdings to have any of the positive effects described above, they must not only play a meaningful role in the life of the company, but the employee shareholders must believe that this is the case.

Employee Shareholders: Creating a Collective Voice

There are two distinct, albeit inter-related, concepts of employee participation related to employee share ownership: First, there is ‘financial’ participation, whereby the holding of shares allows employees to ‘participate’ in the financial success (or otherwise) of the company, through dividend payouts from profits, possibly through issuing further shares (for free or at a discount), and through the rise in value (or otherwise) of the shares. Second, there is the ‘voice related’ participation by employees. This latter type of participation may be related to the former in a number of ways. It may be that companies that have employee share holders will be more likely to pursue participatory human resource management practices. And it may be that these practices will be taken more seriously by employees and hence prove more effective if those employees are also shareholders. Last, if the employee share holding represents a significant enough share of the equity, and provided there is some degree of collectivity in either the holding or voting of those shares, then this in itself will represent a ‘collective voice’.

A parallel can be drawn with the attempts to pool shareholdings in order to create a collective voice sufficient to be listened to that are being undertaken at present by soccer fans who are shareholders of the PLCs that own soccer clubs. When football clubs began to form themselves into limited companies to protect those running the clubs from personal liability should the newly found professionalism of the era go awry, the Football Association spotted the danger of these clubs being used to make profits for their private owners, exploiting the supporters. Therefore, they imposed Articles of Association that debarred profiteering, rules that were circumvented during the 1980s by clubs forming holding companies without these Articles of Association (see Michie 2000). A new organisation was launched in 2000, ‘Supporters Direct’, that provides free legal and other advice to groups of supporters on how they can best achieve a voice within their club. (For further information about Supporters Direct, its genesis, structure, operation and achievements, see Hamil, Oughton, Michie & Warby 2001). This includes mechanisms for pooling shares within trust organisations such as Industrial and Provident Societies. The precise legal structures and other mechanisms vary from club to club, depending on such factors as whether the clubs are owned by PLCs. In general, though, the shares remain the property of the individual shareholders who can withdraw and/or sell the shares at any time. They may also continue to receive the dividend payments on the shares, although there may be a requirement for these to be taken in the form of additional shares rather than cash. The reason of course is that the aim in these cases is to build the collective holding as far as is possible. The point about dividends is, though, not really of much significance, particularly when the individuals are at liberty to sell the additional shares should they so wish.

The experience of Supporters Direct has been hugely positive, as has that of the individual schemes such as the supporter-shareholder group at Manchester United, Shareholders United. First, a significant collective voice has indeed been created. And second, individual supporters have been convinced that their voice is at last being heard through such mechanisms. This has resulted in the active involvement of large numbers of people in such schemes and in their clubs, to an extent that simply would not have otherwise occurred. In some cases it has also led to an increase in both the number of supporters bothering to hold shares in their clubs, and also in the size of each individual’s shareholding. That is, members of such trusts are buying increasing number of shares, to be held collectively, despite the fact that these schemes are operated on a one-person one-vote basis, regardless of the size of individual shareholdings.

For the UK Government’s current attempts to encourage employee shareholding to have any significant impact on companies or the economy more generally, a similar sort of initiative is needed to facilitate a degree, at least, of collective voice for such shareholders. How might such an attempt to enable employee-shareholders an opportunity to exercise their collective ownership rights relate to the role, if any, of trade unions, which up to now have been the main vehicle for providing a collective voice in many workplaces?

The British trade union movement has historically tended to be suspicious of attempts to create alternative structures of representation and involvement, including legislation over terms and conditions that might otherwise be the subject of collective bargaining. Thus, there was in the past some debate over whether Government legislation over a statutory national minimum wage would actually help, if its effect was to undermine the importance of having trade union representation. In practice, though, such legislative arrangements, for example over Health and Safety, have proved only as good as the trade union organisation within the workplace. Thus, trade unions have played an active role in actually enforcing such regulations. It is thus equally possible for trade unions to not only benefit from their members having a collective voice in the enterprise through a pooled shareholding, but also that the benefits of having such a collective voice will be enhanced by also having an active trade union presence to insist that employees be recognised as important stakeholders in their own right - not just as shareholders.

Again the parallel with pooling shares held by soccer supporters is instructive. The creation of such a supporter-shareholder organisation has in some cases gone hand in hand with the operation of the independent supporters association. When supporters’ concerns are dismissed by the PLC Board as being in conflict with the interests of shareholders, which under British company law must take precedence, the supporters are able to re-present their demands as a shareholder group. There is thus plenty of scope for developing a collective voice for employees both as employees and as owners.


To recap, the mechanisms through which employee ownership - along the lines outlined above - may be expected to have a positive impact on performance are as follows. First, research in the US and more recently the UK, has established a positive link from HRM to performance (Guest et al. 2000):

HRM is essentially concerned with achieving results through full and effective utilisation of human resources. This is only likely to be achieved through a set of appropriate practices resulting in high quality, flexible and committed employees. They are likely to be more highly motivated and more innovative, resulting in a more productive but also more satisfied workforce... to ensure high performance, firms should ensure highly competent workers (through selection and training), jobs that give them sufficient autonomy and challenge to demonstrate their competence (through job design) and the kind of employment conditions that encourage motivation and commitment (through a positive psychological contract reflected in fair treatment, status equalisation and employment security). (p.4)

Despite this evidence, however, there remains a surprisingly low degree of adoption of these sorts of progressive human resource management practices. This is described and the reasons for it researched and discussed by Guest, Zing, Conway, Michie and Sheehan-Quinn (2001). Part of the reason may be the relative balance within the Board Room between the Finance Director and others with a focus on the ‘bottom line’ on the one hand, and those who may have more interest in, and commitment to, these sorts of human resource issues. If employee share ownership could be structured so as to give a greater collective voice within the organisation to employees, including in the Board Room - or at least so as to have an influence on the Board Room - then we might expect to see a greater appreciation of and commitment to these sorts of practices (see Konzelmann & Forrant 2003 for a discussion on the role of corporate governance in sustaining creative work systems).

From a theoretical perspective, one of the main conclusions of this paper is therefore that the analysis of corporate governance needs to be extended to incorporate an analysis of all-employee share ownership (not simply executive share ownership) and employee participation, and the associated effects on performance outcomes. This is the subject of a research project currently underway, in which we are researching a number of companies that have, or have had, differing experiences with employee share ownership. While the case work is still underway at the time of writing (April 2003), there are a number of completed cases. For example, on the experience of St. Luke’s advertising agency, now owned by an employee shareholding Trust (Law 1998).

Our discussion of the impact of employee ownership and participation on corporate outcomes suggests three policy implications. First, the UK tax incentives for employee shareholders could be developed with the specific aim of encouraging employee shareholders to participate in trusts that provide a collective voice within the organisation. Such a voice could have a positive impact on the performance of companies, and thereby, the economy as a whole. Without a belief that such individual collective shareholdings are contributing in a meaningful way towards a collective voice, there may not be the necessary commitment from the individual employee shareholders to hold on to those shares. Indeed, they might in this case be better advised to sell and re-invest in some quite different sector of the economy. Tax incentives were introduced in the 2000 and 2001 budgets, but there is scope for further action. There are ways in which the specifics of how the tax incentives currently operate might be improved. More importantly, though, the reference to ‘approved’ collective shareholdings is important. The current criteria for approving trusts could be extended so that schemes would be designed and operated in a manner that was clearly open and democratic, and whose objectives were to operate in the best interests of the company, rather than just to maximise financial returns to the individual shareholder.

Second, such schemes are only likely to develop and operate successfully if a body is established to ensure that this happens, along the lines of the existing Supporters Direct unit. The remit of such an organisation would go beyond what is currently offered by the UK government departments (the Treasury and Inland Revenue). It would allow the appropriate legal and other structures to be developed and to be then provided to any such collective employee-shareholding group. But it would also actively seek to enable each group to benefit from the experience of others in using such holdings to provide an effective collective voice at work. And third, such an initiative - to create a collective voice for employees through employeeshareholder trusts - needs to be accompanied by other corporate governance and company law reform to recognise the importance of different stakeholders within the organisation.

Future research might review the impact of different forms of corporate governance on corporate performance. New forms of corporate organisation and changes in legislation and company law that might encourage the growth of more efficient forms of corporate organisation need to be explored. The way in which existing employee shareholder trusts might be encouraged to play a more active role in providing a collective voice for employees at work could then be considered. Instead of the present Inland Revenue Employee Share Schemes Unit that simply approves such trusts, the theoretical and empirical evidence points to a need to encourage these trusts to play an active role, representing as they do stakeholders and shareholders within their companies. This could play an important role in giving a constructive voice to what has been referred to as the silent stakeholders in UK firms.

A dedicated unit that understands the links between participation and involvement, motivation and commitment, and productivity needs to be charged with the responsibility of approving and administering the schemes in a way that will tap into this huge potential and deliver real benefits. It is no good, as at present, simply setting targets for the number of schemes introduced. That just leads to watered down schemes that hit the numbers target and have precisely zero effect on what the UK Chancellor is actually interested in - productivity. Such reform would cost very little, but the productivity rewards could be huge.


Jonathan Michie is the Sainsbury Professor of Management at Birkbeck, University of London. He was previously at the Judge Institute of Management Studies at the University of Cambridge and before that he worked in Brussels as an Expert to the European Commission on regulatory issues. He has recently completed a project within the ESRC’s Future of Work Program on human resource management, employee motivation, and organisational outcomes and corporate performance. He has published widely in the area of management and economics, including The Political Economy of Competitiveness: Essays on Employment, Public Policy and Corporate Performance (Routledge, 2000, with Michael Kitson) and A Reader’s Guide to the Social Sciences (Routledge, 2001).

Christine Oughton is Reader in Management and Head of the Department of Management at Birkbeck, University of London. She was previously at the University of Birmingham Business School where she was Senior Lecturer in Industrial Economics and Director of the Research Centre for Industrial Strategy and Co-ordinator of Research for the West Midlands Regional Innovation Strategy. With Jonathan Michie, she is leading the ‘Employees Direct’ research project on which this article reports. Christine is author of numerous books and articles on a number of issues including competitiveness, regional economic development, innovation, corporate governance, industrial policy and economic performance.


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